Stagflation

Stagflation – the combination of high inflation and stagnant economic activity coupled with rising unemployment, or the worst of both worlds – has become a buzzword again.

People usually talk about "1970s-style stagflation". In the 1970s, oil price shocks set off soaring inflation and recession in some countries, including the US and the UK, as governments raised interest rates to battle rising prices.

The term was coined in 1965 by the Tory politician Iain Macleod (who in 1970 became chancellor of the exchequer for little over a month, holding the record for the shortest tenure in modern times). He declared in the House of Commons: "We now have the worst of both worlds – not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of 'stagflation' situation."

Under normal circumstances, inflation falls in a recession because wages come under pressure and consumers and businesses spend less so there is less demand for goods and services, driving down their price.